M&A activity to pick up in H2, in tandem with economic rebound: industry players

MERGERS and acquisitions (M&A) activity in the region is set to rise in the second half of the year, amid the easing of Covid-19 pandemic restrictions and a broader economic recovery.

Keoy Soo Earn, managing partner for financial advisory at Deloitte South-east Asia, said ease of travel would help move deals forward: “Deals that were being negotiated and pending the signing of definitive agreements are expected to push forward as foreign investors are now able to complete their site visits and physical meetings with key management and vendors.”

Meanwhile, improving macroeconomic fundamentals should spur corporate investment.

Udaishankar Raman, regional head of advisory at Maybank Investment Banking Group, is expecting the pace of M&A activity to pick up as companies in South-east Asia try to beef up their competitive positions, so they can capitalise on the post-pandemic recovery.

Singapore and Malaysia are likely to see more deals in H2, he said, particularly from sectors that saw “significant acceleration” during the pandemic and have recently turned into “strong secular investment themes”. These would include healthcare, e-commerce and logistics.

In Indonesia, Raman is expecting M&A deals in the plantation sector as companies scour markets for capital to fund their business growth.

But recovering sectors should also begin attracting attention.

Stefanie Yuen Thio, joint managing partner at TSMP Law Corp, noted that private equity funds continue to be active, but added that the industries they focus on could change in H2.

“During Covid, healthcare, tech and online commerce dominated everyone’s attention. Now that the world is coming out of the pandemic, I expect that there will be more interest in bricks and mortar businesses,” she said. 

“Real estate is picking up, and the pent-up demand for travel, dining out and other experiential sectors will start to have those companies appearing on investors’ radar screens.”

Craig Loveless, corporate finance partner and co-head of corporate M&A and securities practice at Norton Rose Fulbright Singapore, said areas to watch include technology and technology infrastructure, energy, as well as real estate investment trusts (Reits). 

He is also expecting to see a continued rise in the volume and value of deals in “new business themes” such as renewable energy and the use of technology to reduce carbon emissions, as the pandemic has accelerated the introduction and importance of these trends.

“We may also start to see M&A activities coming from special purpose acquisition companies (SPACs) that have already listed this year or will do so later in the year or next, given that these new SPACs have a limited M&A window of 24 to 36 months to identify and complete a merger with a target company,” he added. 

Choe Tse Wei, DBS’s group head of strategic advisory, said M&As involving private or unlisted companies are also growing in significance. This trend is driven by investments in private equity or patient capital, fund raising by digital economy and renewable energy companies, as well as leadership changes as founders retire. 

The re-alignment of supply chains has also pushed companies to establish manufacturing and processing capabilities in more than one Asian country, he said.

“Some have done so organically by building factories and mills, while others are undertaking M&A to acquire such capabilities, for example in the semiconductor, electronics and mining sectors,” he said.

Corporate restructuring, which has been a popular theme on the Singapore Exchange in the last year and a half, is expected to continue, Choe added.

Large listed counters that have recently rejigged their portfolios or hived off a business unit include Olam International, Singapore Press Holdings and Yangzijiang Shipbuilding.

TSMP’s Yuen Thio said companies in “sunset sectors” may restructure or consolidate amid pandemic-induced changes in lifestyles and business operations. 

The number of distressed sales or bankruptcies could also rise, industry players said.

Such transactions are a “definite possibility” in the sunset industries, Yuen Thio said.

Maybank’s Raman added that escalating geopolitical tensions from the Russia-Ukraine crisis have already brought about “sharper-than-expected increases” in energy, food and other commodity prices, which will hit companies with commodities accounting for a high proportion of input costs.

Norton Rose Fulbright’s Loveless said higher costs that are not passed on to customers could become a "pressure point for distressed sales or bankruptcy".

"We may still be in early stages for that trend to fully play out in H2, but it is definitely something to keep an eye on for next year."

Deloitte’s Keoy added that cross-border M&A transactions could also come with complications, as rules and regulations may have changed due to the pandemic.   

Said Keoy: “A target in-depth diligence including evaluating the sustainability of the investee’s business model and strategic fit with the investor’s business operations should be carefully performed.”